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WHY ARE DRUGS PRICES SO HIGH?

By Francine Brewer (PSC/CUNY)

This article originally was published by the New
York City Alliance for Retired Americans

The pharmaceutical industry represented by PhRMA (Pharmaceutical Research and Manufacturers of America) tells us that drug prices are high because of the huge expenses incurred by the drug industry for the research and development (R&D) of new, innovative drugs that will improve health and extend lives. PhRMA also states that without U.S. consumers footing the bill for R&D when they buy drugs, new drugs will not be developed resulting in a negative impact on health. Are these statements true? 

Recently, a book by Dr. Marcia Angell (former editor of the New England Journal of Medicine), The Truth About the Drug Companies (How they Deceive Us And What To Do About It) was published by Random House. Dr. Angell is as credible an authority on this subject as anyone could possibly be. 

In her book, Dr Angell refutes the claims made by the pharmaceutical industry described above. She states that R& D costs for new drugs are only a small part of drug company expenditures. Their greatest costs, by far, are for marketing and administration. Of the $200 billion in revenues generated by selling drugs in the U.S., about $20-24 billion is spent on R& D to develop so-called new drugs. 75% of that money or $15-$18 billion goes to develop “me too” drugs. “Me too” drugs are developed by drug companies so that they will get a share of a lucrative market for a best selling drug (i.e., to lower cholesterol). For example, there are six drugs, Mevacor, Lipitor, Zocor, Pravachol, Lescol and Crestor  that are prescribed to lower cholesterol. All of these statin drugs are variants of the first drug and did not require massive expenditures for research and development. Dr. Angell quotes Dr. Sharon Levine, associate executive director of the Kaiser Permanente Medical Group to illustrate the “me too” concept: 

“If I’m a manufacturer and I can change one molecule and get another twenty years of patent rights, and convince physicians to prescribe and consumers to demand the next form of Prilosec, or weekly Prozac instead of daily Prozac, just as my patent expires, then why would I be spending money on a lot less certain endeavor, which is looking for brand-new drugs?”

Of $200 billion in yearly sales, the prescription drug industry spends only $5-6 billion (2.5-3%) on creating new drugs. That very limited expenditure on new drugs has produced very few drugs that can be called innovative or an improvement on older, less expensive, drugs. Compare that $5-6 billion figure with (1) the $3.8 billion spent yearly on direct to consumer (mostly TV) advertising or (2) the 35% of their revenues ($70 billion) spent on marketing and administration (data obtained by Dr. Angell from Securities and Exchange Commission (SEC) and shareholder reports for 2001).  

How much do drug companies spend for marketing and how much do they spend  for administration? Dr. Angell uses information provided by Novartis (one of the biggest drug companies) to differentiate between the two costs. Novartis spends 36 percent of its revenues on marketing and distribution and 5 percent on administration and general overhead.

The claim made by the pharmaceutical industry that high drug prices are warranted because of the costs of research and development for new, innovative drugs cannot be substantiated by the facts. It is simply false and intended to mislead the public. The dishonestly and unjustifiably inflated cost of drugs is used to pay for advertising and marketing drugs to consumers and health care providers (about $60 billion), and for profits which amounted to 18.5% of sales or about $37 billion in 2001. Compare $97 billion for advertising, marketing and profits to the $5-6 billion that is spent to develop new, innovative drugs and you will see that the claims made by the drug industry that the high cost of drugs supports research and development is not true and seriously misleading.
 

OUTRAGEOUS FACTS ABOUT THE DRUG COMPANIES

From THE TRUTH ABOUT THE DRUG COMPANIES:
How They Deceive Us, and What to About It

 by Marcia Angell, M.D.
(Random House; August 31, 2004)
 

1. The pharmaceutical industry claims to be a high-risk business, but year after year drug companies have higher profits than any other industry - by a long shot. In 2002, the top ten American drug companies had a profit of 17 percent, compared with 3.1 percent for the other Fortune 500 industries. The biggest drug company, Pfizer, had a profit of 26 percent. 

2. The industry claims to be innovative, but only a small fraction of its drugs are truly innovative. Of the 78 drugs approved by the Food and Drug Administration (FDA) in 2002, only 17 contained new active ingredients, and only 7 were classified by the FDA as likely to be improvements over drugs already on the market. Most of the others were just minor variations of old drugs.

3. The most profitable drugs are variations of top-selling drugs already on the market - "me-too" drugs. There are whole families of me-too drugs, and no good reason to believe one is better than another at equivalent doses. They cash in on already-established, huge markets. The top-selling drug in the world, Pfizer's Lipitor, is the fourth of six cholesterol-lowering drugs of the same type. 

4. The industry's most innovative drugs usually stem from research done at government or university labs. An internal National Institutes of Health (NIH) document showed that only 1 of the 17 key research papers that led to the five top-selling drugs in 1995 came from the company that sold the drug. Big drug companies license or otherwise acquire about a third of all their drugs from' universities, the NIH, or smaller companies.           

5. Contrary to popular belief, big drug companies spend less on research and development (R&D) than they keep in profits and far less than they spend on marketing. By their own figures, in 2002 (when profits were 17 percent of revenues), the top ten American drug companies spent only 14 percent of revenues on R&D and 31 percent on marketing and administration (of which the lion's share was probably marketing). The industry claims to spend $802 million to bring each new drug to market, but independent analysis shows that the true figure is a small fraction of that amount. 

6. The U. S. is the only advanced country that does not regulate drug costs in some way, and other countries spend only about half as much for the same drugs as Americans. Methods vary, but essentially governments in other countries take advantage of their bargaining power to negotiate prices. Still, drug companies do not sell at a loss in these countries. 

7. The pharmaceutical industry has an iron grip on Congress and the White House. It has the largest lobby in Washington, with more lobbyists than elected representatives, and it contributes heavily to political campaigns. Over the past two decades, Congress has enacted a series of laws that practically ensure windfall profits to the pharmaceutical industry, at public expense. For example, the Medicare prescription drug benefit enacted in 2003 specifically prohibits Medicare from negotiating for lower drug prices. 

8. Drug companies promote diseases to fit drugs. To expand sales, they persuade people in affluent countries that they are suffering from conditions that need long-term treatment. Thus, millions of normal Americans come to believe that they have dubious or exaggerated ailments like "generalized anxiety disorder," "erectile dysfunction," "PMDD," and "GERD." 

9. The part of the FDA that approves new drugs receives half its support from drug companies. The FDA reviews drugs for safety and effectiveness before they are allowed on the market, but drug companies pay large "user fees" in return for quick reviews. That means the agency is beholden to the industry it is supposed to regulate.            .

10. New drugs are not required to be any better than old ones, and there is usually no way to know whether they are. Drugs have to be tested before the FDA will approve them, but they do not have to be compared with older drugs for the same condition, only with placebos. That means we don't know whether new drugs are better or worse than old ones. They just have to be reasonably safe and better than nothing -- ­a low standard indeed. 

11. Drug companies have enormous influence over what doctor are taught about drugs and what they prescribe. The companies support most continuing medical education (CME) courses, medical conferences, and meetings of professional societies. They have armies of sales representatives to visit doctors and teaching hospitals to tout their wares, hand out free samples, and provide meals and other gifts. There is ample evidence that this huge investment in medical "education" pays off in terms of the prescriptions doctors write. 

12. Drug companies have a lot of control over clinical trials of their drugs, which makes drugs look better than they are. They support much of the drug research done in academic medical centers by faculty researchers. In return, they insist on designing studies that increase the likelihood of a favorable result. There is good reason to believe that much of the company-supported research on prescription drugs is biased as a result

13. The pharmaceutical industry portrays itself as a model of American free enterprise, but it is anything but. Of the top ten companies in 2002, half are European. And while the industry is free to decide what drugs to develop and to price them as high as the traffic will bear, it is utterly dependent on government-funded research and government-granted monopolies in the form of patents and FDA­conferred exclusive marketing rights. 

14. Even while the pharmaceutical industry turns out whole families of me-too drugs for relatively mild conditions in affluent people, it pays almost no attention to major scourges in poor people -- like malaria. It also gives short shrift to less profitable drugs. There are shortages of some vaccines and life-saving drugs, such as antivenins for poisonous snakebites; because few companies want to make them.

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